Well, that may not be what they intended to point out, but it is in fact what they pointed out, according to the International Business Times. According to the paper:
"Critics point to the results in France and Italy, which have their own financial tax regimes. In Italy, average daily trading in Italian stocks dropped 29.7 percent in January and February 2014, compared to the average for the same period in 2013, Credit Suisse trading strategy analysts said last year."
The tax rate on trades on exchanges was 0.1 percent on the transaction. If transactions costs averaged 0.3 percent before the tax, then this increased the cost per transaction by 33 percent to 0.4 percent. While the cost per trade will have risen by one third, the critics tell us that trading volume fell by 29.7 percent.
This means that Italian investors are actually spending 6.5 percent less on stock trades now than they did before the tax was put in place (0.703*1.33= 0.935). Since traders don't on average make money on trading (some win and others lose), investors are actually saving money as a result of the tax. The full cost of the tax is therefore coming out of the pockets of the financial industry in the form of reduced trading volume. This would explain why they are critics of the tax.
Robert Shiller rightly deserves his Nobel Prize as perhaps the world's leading expert on asset bubbles. (I beat him by a year on the housing bubble in the United States.) But I think he gets the story badly wrong in making the case that there is currently a serious bubble in the U.S. stock market.
Shiller's rationale is that the price-to-earnings ratio is well above its historic average. Furthermore, he points to the large stock plunges the last three times the price to earnings ratio approached current levels in 1929, 2000, and 2007.
There are two reasons I find the case less than compelling. First, it seems very plausible that people feel more comfortable investing in the stock market today than was the case thirty or forty years ago. This can be explained by the existence of index funds and the growth of defined contribution pensions. As a simple factual matter, a much larger percent of the population has stock holding today than was the case forty years ago, even if the distribution of holdings is still quite skewed.
The implication is that people if people view the market as less risky now than in the past, stock would command a lower risk premium than it had historically. This would justify a higher price-to-earnings ratio. This could mean that something like the ratio of 27 that Shiller calculates, compared to a long-term average of 17, could be reasonable. The ratio of 44 he calculated for 2000 clearly was not. (Note that the 2000 ratio is more than 60 percent higher than the current ratio.)
Btw, the tumble from 2007 peak was associated with a small detail: the collapse of the housing bubble and the ensuing financial crisis. I had warned of the market peak back then not because I thought stock prices were inherently too high, but that no one on Wall Street anticipated the devastation that would follow the collapse of the housing bubble.
The other reason why the current PEs in the stock market might be justified is that interest rates are well below their historic averages. With the nominal rate on 10-year Treasury bonds at just over 2.0 percent and the inflation rate around 1.6 percent, the real interest rate is roughly 0.5 percent. This compares to a long-period average in the range of 2.5-3.0 percent.
With the alternatives to holding stock offering returns that are far lower than they have in the past, it makes sense that people would be willing to accept a much lower return on their stock. The current PE should still allow a premium in the range of 4.0 percentage points relative to bonds, which is roughly the long period average. Of course if we had reason to expect that the real returns on bonds would rise sharply in the near future, then this argument would not carry much weight, but there does not appear to by any good story as to why real bond yields should be headed much higher in the near future.
In short, stocks do look high in the sense that people should expect lower returns in the future than the historic yield on stock, and they certainly should not expect to see anything like the run-up from 2009-2014. However, there is no reason to expect a sharp downturn barring a major downturn in the economy for reasons not currently in sight.
The NYT had an interesting map showing the extent to which countries trade with China as a way of illustrating its importance to the world economy. The main measure of the importance of trade with China is a circle showing the sum of imports and exports.
This is not really accurate, since the impact of a slowdown in China's economy will be very different in its impact on imports and exports. If China's economy's slows sharply then the amount it imports from other countries will likely fall or at least grow considerably less rapidly than if its growth rate had been sustained.
On the other hand, there is no direct effect of slowing on China's exports to its trading partners. There may be an indirect effect insofar as China's slowing is associated with a lower value of its currency. In that case, its goods and services will become cheaper to its trading partners, which will likely lead to more rapid growth in Chinese imports by its trading partners. However this effect is likely to be considerably smaller than the impact on the exports of trading partners, which will fall due to both slower growth and changes in currency values.
It also would have been helpful if the numbers were expressed as shares of GDP. For example, Germany's exports of $94 billion annually to China are far more important to its economy than the $153 billion exported by the United States, since the U.S. economy is more than four times as large as Germany's.
The NYT told readers:
"The Federal Reserve has said that it expects to raise interest rates sometime soon, given evidence over the last year that economic growth is picking up."
This undoubtedly had people wondering what the paper could have in mind. GDP growth has averaged less than 1.7 percent over the last three quarters. While employment growth has remained strong, the pace has slowed in recent months. Wages are barely keeping pace with inflation, with no sign of acceleration. Housing starts have picked up, but non-residential investment has been virtually flat.
In short, we are not looking at a story of the Fed raising rates in an economy that is picking up steam, rather the Fed seems to have lowered its expectations so that it is now prepared to raise rates and slow growth in an economy that is operating well below almost everyone's estimates of potential GDP. What has changed is the Fed's perceptions of an acceptable level of GDP and employment, not the economy.
Andrew Ross Sorkin seems prepared to pronounce Ken Rogoff to be prescient once again with his prediction that China would run into a debt crisis. Rogoff's past claims to prescience might be viewed as somewhat questionable. He, along with co-author Carmen Reinhardt, famously argued that countries face a severe slowdown in growth when their debt to GDP ratios exceed 90 percent. It turned out that this claim was driven by an error in an Excel spreadsheet, nonetheless it was used to justify austerity in the euro zone, the United States and elsewhere. This austerity did help to worsen the downturns caused by the collapse of asset bubbles, in effect contributing to the crisis that Sorkin credits Rogoff with predicting.
Anyhow, the jury is still out as to whether China will face a serious slump due to its market downturn, as Rogoff himself is quoted as saying in Sorkin's piece. The prediction on which Rogoff and just about everyone else in the world has been proven correct is that China's stock market bubble would burst. (It had risen by 150 percent between June of 2014 and June of 2015.) Rogoff does not seem prepared to say even now that this will lead to a more general collapse of China's economy.
We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the U.S. (Wall Street seems to be rallying as I write.) There are a few items worth noting as we enjoy the panic.
First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.
Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.
Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expecting the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn't.
If folks can take a break from worrying about how robots are going to take all the jobs, they may want to look at a NYT piece on Japan's excess supply of housing. The basic story is that because of Japan's declining population there are now hundreds of thousands of homes across the country that are sitting empty because no one wants them.
While this is an interesting and important story, the piece also includes the standard nonsense about the demographics of an aging population devastating Japan's economy. It tells readers:
"The demographic pressure has weighed on the Japanese economy, as a smaller work force struggles to support a growing proportion of the old."
Let's see, if the smaller workforce is struggling to support a growing population of elderly they must be working weekends and overtime to make up for the shortage of workers. It seems the OECD hasn't gotten word of these struggles. According to its data, the average work year has fallen from 2,121 hours in 1980 to 1,734 hours in 2013. If Japanese workers put in as many hours today as their counterparts did three decades ago, it would give them the equivalent of 22.3 percent more workers. It's hard to see the evidence of the struggle in these numbers.
The piece also comments that Japan is:
"still building more than 800,000 new homes and condominiums a year, despite the glut of vacancies."
Maybe if the country is having such a hard time meeting the needs of its retirees, it should spent fewer resources building homes that may not be needed.
Seriously, the effects of productivity growth swamp the demographic changes that the elites keep yapping about. If Japan could lift its rate of annual productivity growth by 0.5 percentage points over the next thirty years, it would swamp the impact of its aging population. If we believe anything remotely like the robot taking our jobs story, then aging is nothing to worry about. In fact, it is a good thing since it means there are fewer people for whom we have to find work.
Joe Nocera rightly takes Jeff Bezos to task for making Amazon an undesirable place to work. (Sorry, I have more sympathy for the warehouse staff in overheated warehouses than the overachievers who are treated poorly at headquarters.) However he gets one part of the story wrong.
He tells readers:
"Practically from the moment Amazon went public in 1997, Wall Street has pleaded with Bezos to generate more profits. He has ignored those pleas, and has plowed potential profits back into the company. Bezos believes that if Amazon puts the needs of its customers first — and no company is more maniacally focused on customers — the stock will take care of itself. That’s exactly what has happened. That is the good side of Bezos’s indifference to the opinion of others."
While it is clear that the stock market has rewarded Amazon, just as it rewarded AOL.com in the 1990s bubble, it is not clear that Amazon had "potential profits" to plow back. Profits are independent of investment decisions, at least if a company is not engaged in accounting fraud. Amazon may have kept prices low to expand market share, thereby depriving itself of profits, but then it doesn't have money to plow back either. It is very hard to make sense of the assertion that Amazon somehow doesn't have profits because it is re-investing, although if it gets not very bright market actors to believe it, Amazon's share price can continue to rise.
It is also important to note the big handout that Amazon has relied upon from taxpayers. Amazon has not had to collect sales tax in most states for most of its existence, giving the company an enormous subsidy in its competition with brick and mortar competitors. The cumulative size of this subsidy almost certainly exceeds its cumulative profits in the years that it has been in existence. Any discussion of Bezos success should mention this huge subsidy from the government.
In his two months as a candidate for the Republican presidential nomination, Donald Trump has said many things that are racist, sexist, or otherwise offensive, but that doesn't mean that everything he says is off the mark. The Wall Street Journal took Trump to task yesterday for dismissing the relatively low official unemployment rate and instead focusing on the large number of people who are not working.
While the WSJ is right that the vast majority of people who are not working are people who chose not to work. These are older people who are retired, young people who are still in school, or people who are taking time out of the labor force to care for children or other family members.
Nonetheless, even if we control for changes in demographics there has been a sharp decline in the employment rate of prime-age workers (ages 25-54) from the pre-recession level. The employment rate of prime age workers is still down by almost three percentage points from its pre-recession level and almost four percentage points from its peak in 2000.
While many analysts try to explain this falloff with vigorous hand waving, it is almost certainly due primarily to the weakness of the labor market. It is implausible that millions of prime-age workers suddenly decided that they don't feel like working. Trump is right to call attention to the drop off in employment, even if he is wrong to be worried that our grandparents or teenage children aren't working.
In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.
Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter's re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.
While this point is undoubtedly accurate, there is another complication when we try to get a sense of people's perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman's chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.
Here is how the two compare for 1978-1981.
1978 9.0% 7.8%
1979 13.3% 10.7%
1980 12.5% 10.7%
The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let's keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people's perceptions of their well-being or whether we should only care about what we might think of now as the "true" rate of inflation.
I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It's based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person's assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS's assessment? It's very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.
On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.
There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I'd argue yes, but we'll leave that one for another day. For today, I'll just say that it was not only Paul Volcker's Fed that doomed Jimmy Carter's re-election prospects, but also the mistakes made by the folks at BLS.
Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing "income-share agreements" where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.
My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender's problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.
He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).
That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:
"It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program."
Sorry folks, but anyone who thinks the federal government is "bankrupt" should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to "bankrupt" borrowers at less than 2.1 percent interest.
If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel's calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.
If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.
That's what millions of people are asking after reading a NYT article contrasting the "bombastic" Donald Trump to Jeb Bush who is described as "the wonky son of a president." Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.
The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.
The Post has an interesting piece on a St. Louis Federal Reserve Bank study which shows that African American and Hispanics with college degrees have far less wealth than their white counterparts. (Stay turned for CEPR study showing this story with wages.) The study also shows a large decline in wealth for African Americans and Hispanics with college degrees over the last two decades.
It attributes much of this decline to subprime mortgages pushed by lenders during the bubble years:
"But African American and Hispanics were often steered into high-cost home loans that many could not afford once the housing market crashed. Those who managed to stave off a foreclosure still watched the value of their properties took a nosedive, especially if they lived in minority neighborhoods."
While a subprime loan made it more difficult for homeowners to keep their homes in the crash, the loss of wealth was due to plunging house prices. Even if an African American or Hispanic family bought a house with a traditional fixed rate 30-year mortgage they still would have seen a huge hit to their wealth when the housing bubble collapsed.
This point is important because the warning signs were everywhere for economists and policy analysts to see. However, they chose to ignore them and encouraged minorities to buy homes at bubble-inflated prices where they were virtually guaranteed to see large losses. Unfortunately, most of the people who were involved in setting housing policy during the bubble years are still in the same business today. Most do not appear to have learned much from the experience.
It might have been worth a few sentences calling attention to the seeming irony in the industry's objections to proposed regulations that would limit emissions of methane gas. The NYT article noted that a large share of greenhouse gas comes from such methane emissions. At the same time, the industry has promoted fracking as a way of developing a bridge fuel, that emits less greenhouse gas than the coal it replaces, until renewable energy becomes cheaper.
If the net effect of fracking is to reduce emissions, then regulations that ensure this outcome should not pose a problem for the industry. The regulations should only be a major issue for the industry if it turns out that methane gas emissions largely or completely offset any reductions in carbon dioxide emissions.
In an interesting piece on the decline of the political center, E.J. Dionne wrongly lists globalization as a villain. He tells readers:
"Globalization weakens the ability of moderate governments of both varieties to deliver on their promises. Capital can flee easily to more congenial climes, undercutting a nation’s tax base and its regulatory efforts."
Globalization should also have the effect of reducing inequality by making it easier to take advantage of lower cost professional services (e.g. physicians services, lawyers' services, dentists' services) except that the United States has acted to maintain or even increase barriers to trade in these areas. It should also make it easier to circumvent patent and copyright monopolies that redistribute income upward, except we have consciously pursued policies to strengthen these forms of monopolies to limit the extent to which developing countries might provide vehicles for avoidance (in contrast to tax policy).
Also, governments with their own currency (e.g. the United States, the U.K., and the euro zone collectively) need not be restricted by their tax take in terms of spending, as long as they are below full employment. The decision not to use fiscal policy to bring economies to full employment is due to superstitions, not actual limits imposed by globalization.
Yes, it can be hard getting access to information in the barren heart of the nation's capital. Therefore it is not surprising that the Washington Post seems completely unaware of the economic situation in Japan at present.
In an account of the economic problems facing the world the Washington Post told readers:
"Japan, meanwhile, has recorded years of slow growth, has alarming public debt levels and is perpetually on the brink of deflation."
Actually in terms of employment growth, which is probably what matters most to the Japanese people (as opposed to GDP growth), the country has been doing pretty well as of late. According to the OECD, Japan's employment to population ratio (EPOP) has risen by 2.4 percentage points from 70.8 percent to 73.2 percent since the new Prime Minister Shinzo Abe took power in the fourth quarter of 2012 and embarked on a policy of aggressive fiscal and monetary stimulus. By comparison, the EPOP in the United States rose by 1.4 percentage points to 68.7 percent in this period. If the EPOP in the United States had risen by the same amount as in Japan it would correspond to another 2.5 million jobs.
It's not clear who the current levels of Japanese debt are supposed to be alarming to, but clearly financial markets do not fall into this group. The interest rate on long-term Japanese government bonds is 0.38 percent. In terms of being on the brink of deflation, fans of economics everywhere would say, "so what?" The United States, Europe, and Japan all have inflation rates that are lower than is desirable. If the inflation rate ends up being a small negative number rather than a small positive number it doesn't matter. Any fall in the inflation rate, regardless of whether it means crossing zero makes debt burdens worse and raises real interest rates.
Steve Rattner had a column in the NYT in which he derided Donald Trump's economics by minimizing the impact of trade on the labor market. While much of Trump's economics undoubtedly deserve derision, Rattner is wrong in minimizing the impact that trade has had on the plight of workers.
Rattner tells readers:
"In Mr. Trump’s mind (although not in the minds of serious economists), that’s why [the trade deficit] we’ve lost five million manufacturing jobs since 2000.
"The Chinese are certainly protectionists, but a shift in manufacturing jobs was inevitable. For centuries, as countries have developed, the locus of jobs has shifted based on comparative advantage.
"Moreover, many of those manufacturing jobs weren’t lost to other countries but to growing efficiency, just as employment in agriculture in the United States has fallen even as output has risen."
"No policies could reverse tectonic forces of this magnitude, and in suggesting that there are remedies, Mr. Trump is cynically misleading the American public."
There are several points here that are worth correcting. First, productivity in manufacturing is not new, but the large-scale loss of manufacturing jobs is. According to the Bureau of Labor Statistics, in 1971 we had 17,200,000 jobs in manufacturing. In 1997, we 17,400,000 jobs. This is in spite of the fact that there was enormous productivity growth in manufacturing over this quarter century. Manufacturing employment then fell to 13,900,000 in 2007, the last year before the crash. The big difference between this decade and the prior twenty-six years was the explosion of the trade deficit as jobs were lost to China and other developing countries.
The fact that we would have more manufacturing jobs without the trade deficit is almost definitional. We currently are running a trade deficit of more than $500 billion a year, a bit less than 3.0 percent of GDP. Total manufacturing output is roughly $1.8 trillion, which means that if we filled the deficit entirely with increased output of manufactured goods, we would expect to see manufacturing employment rise by more than a quarter ($500 billion divided by $1,800 billion), creating more than 3 million new manufacturing jobs.
There is also a fundamental difference between the shift out of manufacturing jobs and the shift out of agricultural jobs to which Rattner refers. Workers left agricultural jobs for higher paying higher productivity jobs in manufacturing. The jobs didn't actually disappear, the workers did not want them.
This is the exact opposite of what we are seeing with manufacturing jobs. Workers are losing relatively good paying jobs in sectors like autos and steel, and are then forced to take lower pay and lower productivity jobs in the retail or restaurant sectors.
Paul Krugman had a nice blogpost outlining some of the key issues in the literature on optimal currency unions. The question is what happens in a currency union like the euro zone, which is not optimal for many reasons, if there is free mobility of labor.
Krugman points to the experience of Portugal and argues that mobility of labor actually makes the situation worse, not better. The story is that much of Portugal's prime age labor force is emigrating to other countries in the European Union, leaving behind a population of retirees, without a working age population to pay their benefits. This is similar to the story with Puerto Rico, although as Krugman points out, due to the fiscal union with the rest of the United States, retirees in Puerto Rico can still count on their Social Security and Medicare, as well as other payments that flow from Washington.
It is worth taking another step with this one to think about Detroit. There we have a situation where the the downturn in the auto industry is a big hit to the city and the region. However, white workers were able to escape many of the bad effects by stepping over the city lines and move to the suburbs. Due to discrimination in housing and lending, African Americans find the move to the suburbs much more difficult, therefore leaving many of them stuck dealing with the effects of the loss of much of the city's employment base.
This picture is clearly somewhat exaggerated. People can move to other cities and many African Americans have moved to Detroit's suburbs, but the reality of discrimination, certainly in the very recent past and which undoubtedly continues to some extent into the present, has made it considerably more difficult for African Americans in Detroit to escape the fallout from the collapse of the auto industry than for its white population.
Economists and people who write about the economy are not known for being especially astute when it comes to economic issues. After all, there were almost no people in this group who were able to see the $8 trillion housing bubble whose collapse sank the economy. More recently, we have a substantial clique running around yelling that the robots will take all the jobs. This is at the same time that we continue to have most of the Washington elite types fretting that the retirement of the baby boomers will leave us without any workers. These concerns are 180 degrees opposite, sort of like complaining that the soup is too hot and too cold, but that's the sort of conceptual absurdities folks have come to expect from people who write about the economy.
The usually astute Catherine Rampell is one of the guilty parties today, telling readers that the recent drop in the value of the Chinese yuan is a response to the market, not the result of currency management by China's government. The problem in this story is that it ignores that China's central bank is holding more than $4 trillion of reserves, about $3 trillion more than would be expected for an economy of China's size. This stock of reserves has the effect of raising the value of the dollar and other reserve currencies against the yuan.
If that is not obvious, consider the analogous situation with the Federal Reserve Board and its holding of more than $3 trillion in assets as a result of it quantitative easing (QE) policy. Under this policy, the Fed bought up large amounts of government bonds and mortgage backed securities. The idea was that the Fed's purchases would drive up the price of these bonds and thereby directly lower long-term interest rates.
The NYT went a couple of miles over the top with Peter Eavis' analysis of China's currency devaluation. It begins by telling readers;
"For years, China looked like the principled noncombatant. As other countries, seeking to secure an economic advantage, let the value of their currencies slide on international markets, China held firm on the value of its money."
"The principled noncombatant?" What are they smoking over there? China accumulated more than $4 trillion in reserves to keep its currency from rising against the dollar. China looked to the world outside of the NYT like the principal combatant. This massive intervention led China to run massive trade surpluses, peaking at more than 10 percent of GDP in 2007.
Fans of economics everywhere know that fast growing developing countries like China are supposed to run large trade deficits, as capital is supposed to flow from slow growing rich countries to fast growing developing countries. Given China's 10 percent plus annual GDP growth a trade deficit of 10 percent of GDP would have been reasonable, instead China had that reversed.
This also explains the massive housing bubble in the United States and other wealthy countries. With trade deficits creating enormous gaps in demand, the only way they could be easily filled was with demand driven by asset bubbles. (We could have filled the demand gap with large budget deficits, but people in positions of power in Washington are superstituous, so we can't run large budget deficits to fill demand gaps.)
The rest of the article is no more in touch with reality. It tells readers:
Yes, I know oil is priced in dollars, not euros, but it doesn't make one iota of difference. In an article on the meaning of the drop in the value of the yuan on people in the United States, USA Today told readers:
"China, the world's second largest economy, consumes a lot of oil, second only to the U.S. However, oil prices are denominated in dollars, so a gutted yuan means China's purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products. That reduction in demand could lower prices, an upside for American drivers."
Everything in this paragraph would be equally true if oil was priced in euros. The Chinese currency is now worth less measured in dollars, euros, yen, or oil. The loss of purchasing power will lead China to buy less of everything that is produced abroad, including oil. The fact that oil is priced in dollars matters not at all.
As a practical matter, anyone hoping to get super cheap gas due to less demand from China is likely to be disappointed. If we assume that the 2 percent drop in the value of the yuan leads to 2 percent higher gas prices in China, and we assume an elasticity of demand of 0.3, then China's gas consumption will fall by roughly 0.6 percent as a result of the devaluation. This almost certainly has less impact on the demand for gas than even a one-year reduction in China's growth rate by 2 percentage points. If the devaluation and other stimulatory policies speed growth in China, then we may see increased rather than decreased demand for oil from China.
The piece also gets the story of U.S. companies manufacturing in China somewhat confused. It tells readers: